Child benefit cuts to hit 1.2m families

More than a million families are set to lose up to around £3,000 due to a change to child benefit rules.

Those affected will receive letters in the next few weeks explaining that the benefit is to be clawed back from those deemed wealthy enough to manage without it by the government.

Critics claims that it will draw an extra 500,000 people into the onerous net of tax self-assessment and cause huge confusion.

There are also concerns that it will unfairly penalise some families, while those in which both parents earn up to £50,000 could have a household income of almost £100,000 but still receive their child benefit in full. Here, we take a closer look.

Who will be affected?
The change will apply to higher earners whose families also receive child benefit, which is worth £20.30 a week for the first child and £13.40 for other children.

Any household where a parent earns more than £50,000 will see the new tax levied at 1% of the value of child benefit per £100 of income over that £50,000 threshold.

So someone earning £55,000 who has two children would pay an extra £876 in tax, or 50% of their £1,752 annual child benefit.

Those earning more than £60,000, meanwhile, will repay the whole amount - or an extra £3,146 for someone with four children.

When will the new tax come in?
The new tax will be brought in on January 7, 2013. However, as the Revenue will not be able claim any money until it knows your earnings for the full tax year, most people will only start paying the extra tax in January 2014.

From then on, higher earners are likely to have their tax codes adjusted so that the money will be automatically taken each month based on their income in the previous year.

Why is this happening?
The government is on a cost-cutting drive. Chancellor of the Exchequer, George Osborne, has already trimmed the welfare budget by some £18 billion and is currently trying to slash it by a further £10 billion.

Wealthier families may not be the only ones to lose out on child benefit, though. Government sources have hinted that unemployed families could be deprived of support in the form of child benefits or extra income support if they decide to have another child.

Is there any way to avoid the new tax?
The simplest way to avoid the extra tax is to pre-empt it by giving up your family's child benefit.

However, you could end up sacrificing their child benefit needlessly if your earnings end up below the threshold. The same is true if you end up losing your job, for example.

This is because someone choosing to have say £10,000 of their £60,000 salary paid directly into a pension fund would slip under the £50,000 threshold as a result.

It is important to take independent advice before taking this type of decision, however.

Laith Khalaf, pension investment manager at adviser Hargreaves Lansdown, said: "There are plenty of factors other than child benefit that people need to consider when they are making a pension contribution."